Tuesday, October 23, 2007

Research Papers Summaries Ch.22 Implementation and Management Guidelines for M&As

The summaries are of research papers referred to in the chapter 22. Implementation and Management Guidelines for M&As of Takeovers, Restructuring, and Corporate Governance by J. Fred Weston, Mark L. Mitchell, and J. Harold Mulherin, 4th Edition, Pearson Education, 2004.

These summaries help to deepen the knowledge in various topics covered in the book.


Summary of
Gregor Andrade, Mark Mitchell, and Erik Stafford,
“New Evidence and Perspectives on Mergers”
Journal of Economic Perspectives—Volume 15, Number 2— spring 2001—Pages 103–120

In this paper, authors provide evidence that merger activity in the 1990s, as in previous decades, strongly clusters by industry. Furthermore, they show that one particular kind of industry shock, deregulation, while important in previous periods, becomes a dominant factor in merger and acquisition activity after the late 1980s and accounts for nearly half of the merger activity since then. Authors tried to answer: What are the long-term effects of mergers, and what makes some successful and others not.

Mergers in the 1990s: What’s New?

In this paper, the stock database from the Center for Research in Security Prices (CRSP) at the University of Chicago, that contains pricing information for all firms listed in the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and Nasdaq was used. The focus was on mergers where both the acquirer and the target were publicly traded U.S.-based firms.

Aggregate Merger Activity

The authors write: The evidence is entirely consistent with the well-known view that there have been three major waves of takeover activity since the early 1960s. Interestingly, the 1960s wave contained many more deals, relative to the number of publicly available targets, than the 1980s.
It is astounding that the merger and acquisition activity in the 1990s seems to be even more dramatic and widespread, with number of deals comparable to the 1960s, and values similar to the 1980s.
• The first key distinction between mergers of 1980s and 1990s is the overwhelming use of stock as a method of payment during the latter decade. About 70 percent of all deals in the 1990s involved stock compensation, with 58 percent entirely stock financed. These numbers are approximately 50 percent more than in the 1980s.
• Only 4 percent of transactions in the 1990s involved a hostile bid at any point, compared to 14 percent in the 1980s, and a hostile bidder acquired less than 3 percent of targets
• The evidence for the 1980s by itself is interesting, because it suggests that the hostility of takeover activity during that time was less severe than generally believed.
• Finally, the 1990s continue a trend, begun in the 1970s, of an ever-increasing percentage of mergers where both parties are in the same industry

Although merger and acquisition activity, as discussed above, occurs in readily identifiable waves over time, these waves are not alike. It is also seen that industries that exhibit high levels of merger activity in one decade, are no more likely to do so in other decades. If mergers come in waves, but each wave is different in terms of industry composition, then a significant portion of merger activity might be due to industry level shocks like technology innovations, supply shocks or deregulation. Industries react to these shocks by restructuring, often via merger. Mitchell and Mulherin (1996) show that deregulation, oil price shocks, foreign competition, and financial innovations can explain a significant portion of takeover activity in the 1980s.

Of the shocks listed above, deregulation is an ideal candidate for analysis. First, it creates new investment opportunities for the industry. Second, it potentially removes long-standing barriers to merging and consolidating, which might have kept the industry artificially dispersed. Finally, it is fairly well-defined in time and in terms of parties affected, so empirically we know where and when to look. It is clear that deregulation was a key driver of merger activity over the last ten years.

The industry shock explanation for mergers has provided sufficient information about the timing of merger activity in an industry. Future empirical research on mergers should attempt to control for industry shocks.

Winners and Losers in the Merger Game

Measuring value creation (or destruction) resulting from mergers and determining how this incremental value is distributed among merger participants are two of the central objectives in finance and industrial organization merger research.

Mergers represent massive reallocations of resources within the economy, both within and across industries. From the firm’s perspective, mergers represent quite extraordinary events, often enabling a firm to double its size in a matter of months.
Stock Market Reaction to Merger Announcements
To study the value creation by mergers stock market corrections are studied by using traditional short-window event studies. Therefore, two commonly used event windows are the three days immediately surrounding the merger announcement—that is, from one day before to one day after the announcement—and a longer window beginning several days prior to the announcement and ending at the close of the merger.

• The combined average abnormal returns over this event window are fairly constant over decades and are reliably positive, suggesting that mergers do create shareholder value on average. If the event window is expanded to 20 days prior to announcement and ending on closing date statistical precision is considerably reduced.

• Target firm shareholders are clearly winners in merger transactions. The average three-day abnormal return for target firms is 16 percent, which rises to24 percent over the longer event window. Each decade is associated with merger activity concentrated in different industries, but the target firms consistently have abnormal returns of 16 percent in the announcement period. Together, these two observations suggest that merger premia are fairly similar across different types of merger transactions.

• The evidence on value creation for acquiring firm shareholders is not so clear cut. The average three-day abnormal return for acquirers is -0.7 percent, and over the longer event window, the average acquiring firm abnormal return is -3.8 percent. It is difficult to claim that acquiring firm shareholders are losers in merger transactions, but they clearly are not big winners.

Mergers seem to create value for shareholders overall, but the announcement period gains from mergers accrue entirely to the target firm shareholders. However it is said that mergers financed with stock, at least partially, have different value effects from mergers that are financed without any stock. From the acquiring firm’s perspective, stock-financed mergers can be viewed as two simultaneous transactions: a merger and an equity issue. On average, equity issues are associated with reliably negative abnormal returns of around -2 to -3 percent during the few days surrounding the announcement.

• Acquiring firms that use at least some stock to finance their acquisition have reliably negative three-day average abnormal returns of -1.5 percent, while acquirers that abstain from equity financing have average abnormal returns of 0.4 percent which are indistinguishable from zero.

• Target firm shareholders also do better when there is no equity financing. The three-day average abnormal return for target firms is 13 percent for stock-financed mergers and just over 20 percent for mergers financed without stock.

• The combined average abnormal returns for stock-financed mergers are zero whereas for mergers financed without any stock are reliably positive at 3.6 percent.

Long-Term Abnormal Returns
Several recent long-term event studies measuring negative abnormal returns over the three to five years following merger completion cast doubt on the interpretation of traditional short-window event study findings. In fact, some authors find that the long-term negative drift in acquiring firm stock prices overwhelms the positive combined stock price reaction at announcement, making the net wealth effect negative.

Large difference in long-term abnormal returns is based on:

• Stock financing and cash mergers: Loughran and Vijh (1997) found that acquiring firms using stock financing have abnormal returns of 224.2 percent over the five-year period after the merger, whereas the abnormal return is 18.5 percent for cash mergers.

• Book-equity ratio: Using the value/growth distinction, Rau and Vermaelen (1998) calculate three-year abnormal returns of 217.3 percent for glamour acquirers and 7.6 percent for value acquirers over the period 1980-1991.

There are a number of methodological concerns with long-term event studies. The basic concern stems from all tests of long-term abnormal performance being joint tests of stock market efficiency and a model of market equilibrium (Fama, 1970). If long-term expected returns can only be roughly estimated, then estimates of long-term abnormal returns are necessarily imprecise. An additional statistical concern with many long-term event studies is that the test statistics assume that abnormal returns are independent across firms. However, major corporate actions like mergers are not random events, and thus event samples are unlikely to consist of independent observations.

Pre- and Post-merger Profitability
Operating performance studies attempt to identify the sources of gains from mergers and to determine whether the expected gains at announcement are ever actually realized and reflected in the firm’s cash-flows. Ravenscraft and Scherer (1989) and Healy, Palepu and Ruback (1992) are two operating performance studies but they both reach different conclusions.

• Ravenscraft and Scherer (1989) examine target firm profitability over the period 1975 to 1977 using Line of Business data collected by the Federal Trade Commission and conclude that mergers destroy value on average.
• Healy, Palepu and Ruback (1992) examine post-merger operating performance for the 50 largest mergers between 1979 and 1984. They say that the post-merger operating performance improves relative to the industry benchmark.

Authors conclude:
Where Do We Stand?

Earlier studies on mergers conclude that mergers create values for the stakeholders of combined firms based on announcement-period stock price reaction; this study also concurs with prior reviews. We are inclined to defend the traditional view that mergers improve efficiency and that the gains to shareholders at merger announcement accurately reflect improved expectations of future cash flow performance. But the conclusion must be defended from several recent challenges.

• A first challenge is the research findings of a negative drift in acquiring firm stock prices following merger transactions, which would imply that the gains from mergers are overstated or nonexistent. These studies are skeptical as in order to measure long-term abnormal returns reliably, one must first be able to measure long-term expected returns precisely and no one has provided a convincing way to do this.

• A second challenge is that the underlying sources of the gains from mergers have not been identified. The positive effect of the merger is recognized by the stock market, but it is difficult for economic researchers to identify the sources of the gains with their much coarser information sets.

• A third challenge is that all of the gains from mergers seem to accrue to the target firm shareholders. The fact that mergers do not seem to benefit acquirers provides reason to worry about this analysis. So we can say that if mergers could be sorted by true underlying motivations, it may be that those which are undertaken for good reasons do benefit acquirers, but in the average statistics, these are cancelled out by mergers undertaken for less benign reasons. It is still puzzling from the data that acquirers rarely gain in spite of “synergy effect”. Another difficulty is to decide what the abnormal returns for acquiring firms should be? Empirical studies of other investment decisions, typically report very small (less than 1 percent) abnormal returns at the announcement of the investment decisions. In the light of such evidence, the announcement period an abnormal return of 0.4 percent for non-stock acquirers is same as those for other types of investments.

Saturday, October 20, 2007

M&A Case Directory

Acquisitions by CISCO

Acquisitions by GE

Dr.Reddy - Betapharm

Franklin Templeton - Kothari Pioneer

Grasim - L&T

Hindalco - Novelis

Holcim - ACC

Holcim - Gujarat Ambuja Cements Ltd.

Jet Airways - Air Sahara

Mittal - Arcellor

Oracle - I'Flex

Ranbaxy - Terapia

Reliance Industries - Demerger

Suzlon - Repower

United Breweries - White & Mackay

Vodafone - Hutchinson Essar

Vodafone - Mannesmann

Friday, October 19, 2007

Acquisitions by GE - Case Study

Nikhil Mittal, P A Jeetendra, Saurabh Bishit, Vineet Gupta (PGDIM 13, NITIE)

GE is a prolific acquirer of companies. The case study documents some of the recent acquisitions.

U.S. conglomerate General Electric Co. has agreed to buy British maker of oilfield services equipment Sondex Plc a company listed on the London Stock Exchange on 3rd September 2007. The announcement was made in London UK.

Sondex is headquartered in Hampshire in the UK and specializes in the design, manufacture and sale of electro-mechanical downhole tools and surface equipment to oilfield service companies who run well-site operations on behalf of oil and gas production companies.

Sondex makes flow-meters and other electronic instruments to measure the quality of oil and gas in wells, and had revenue of 68.5 million pounds in the year ended Feb. 28. Fairfield, Connecticut-based GE will combine the unit with its energy division, which has sales of $19.1 billion and products such as turbines and solar equipment.
``Sondex is one of the best niche players in oilfield services and with GE's global clout that immediately becomes a worldwide proposition,'' said Mark Breslin, an analyst at McCall Aitken McKenzie in Stirling, Scotland, with an ``accumulate'' rating on Sondex. ``GE has been steadily moving up the chain to more high-value devices.''
Sondex develops and manufactures electro-mechanical equipment used in oil and gas fields such as drilling and transport tools as well as more sophisticated devices that measure well performance and the quality of the oil being mined. The company has embarked on a series of acquisitions since it listed in 2003, including the Aberdeen-based Geo-link, Bluestar in Canada and the Texan company Ultima Labs.
The integration into GE's business will enable the company to tap into fast-growing markets around the world, in particular China where the company has a fledgling operation, and Russia.

The company's existing management team led by Mark Perry, the chief executive of Sondex, will stay on after the acquisition is complete. Last year Sondex notched a 33 per cent increase in revenue to nearly £70m, with pre-tax profit rising 14 per cent to £8.5m. In June, it said that orders had risen 20 per cent on the previous year due to strong demand in China and Russia.

In contrast, GE's Optimization and Control unit, which has never acquired a company outside the United States before, recorded revenue of $1.1bn.


General Electric, whose interests span technology, media, energy and financial services, will pay 460 pence a share for Sondex, which designs, makes and markets electro-mechanical based equipment for oilfield service companies. That is 35.5 percent above Sondex's closing share price on Aug. 30, the day before it announced it was in takeover talks. The total valuation of Sondex stands at 288.7 million pounds ($583.1 million).

The price being offered by GE is ``fair and reasonable,'' says industry analysts.
Sondex said June 20 that orders were 20 percent ahead of last year, helped by demand in China and Russia. Fiscal 2007 profit through February increased to 5.7 million pounds from 5.1 million
pounds on revenue 33 percent higher at 68.5 million pounds. The U.K. company last year
acquired Ultima Labs Inc. to add the Houston-based company's technology used to measure the
fluid content of rock formations.
Synergies and Benefits claimed:
“Sondex will be an important addition to GE Energy's portfolio of businesses, complementing
our existing Tensor product line. The company brings to us a broad range of advanced products
and technologies, as well as employees with a deep understanding of the customers they serve.
We expect the combination to form a substantial growth business for GE going forward.” said
Brian Palmer, Vice President of GE Energy’s Optimization and Control business.
"The acquisition of Sondex by GE is an exciting move for our company and employees. With
GE, we will have greater resources to further develop innovative new technologies and together
with one of the world’s most respected companies, we will be able to provide an enhanced level
of global support to our customers.” said Martin Perry, Chief Executive of the Sondex Group.
Sondex, with operations in the U.S., the U.K. and seven other countries, will operate as part of
GE Energy's Optimization and Control business. Sondex makes products to monitor reservoir,
well and production conditions. GE's Tensor division makes oil and gas sensors. "Sondex will be
an important addition to GE Energy's portfolio of businesses, complementing our existing Tensor
product line," said Brian Palmer, vice president of GE Energy's Optimization and Control

"With GE Energy, we will have greater resources to further develop innovative new technologies
and provide an enhanced level of global support to our customers," said Sondex CEO Martin
Structuring of the deal
General Electric has bought Sondex in an all cash deal.
Financing of the deal
General Electric will finance the deal from its reserve and surplus.
Advisors to the Buyer and Sellers
Sondex, headed by Chief Executive Officer Martin Perry, is being advised by Investec. Credit
Suisse advised GE.
Subsequent Performance
On 3rd September Sondex shares were up 7.5 percent at 454.25 pence by 0752 GMT.
GE’s share rose by 0.17 dollars (+0.4%) to 39.04 dollars at that time.
Smiths Aerospace
Global giant GE Aerospace announced on 12th January, 2007 that it was acquiring
Smiths Aerospace which is a manufacturer of aircraft control & diagnostic systems.
Smiths is a global technology company, listed on the London Stock Exchange.
Smiths Group is a world leader in the practical application of advanced
technologies. Its products and services make the world safer, healthier and more
productive. Smiths Group has four divisions: Aerospace, Detection, Medical and
Specialty Engineering. It employs 32,000 people and has over 250 major facilities in
50 countries. For more information visit www.smiths.com
Smiths Aerospace is a leading transatlantic aerospace systems and equipment
business, with more than 11,000 employees and $2 billion revenues globally. The
business holds key positions in the supply chains of all major military and civil
aircraft and engine manufacturers and is a world-leader in digital, electrical power,
mechanical systems, engine components and customer services.
Smiths Aerospace is the largest division, with sales of £1.3bn. It is a tier-one
supplier to the world’s major aircraft and engine manufacturers, such as Boeing,
Airbus and Rolls-Royce. Although exposed to the delayed Airbus A380, otherwise
known as the superjumbo, Butler-Wheelhouse said that “this program will have
minimal profit effect in the early years. On the other hand, the Boeing 787, which
we’ve invested in heavily, has gone extremely well.”
And the outlook for the sector is buoyant. “For both military and commercial
aircraft, we see continued strength at least through 2009.” With this level of
earnings visibility, I think the unit is worth some £2.3bn, representing a 2005/2006
EBIT multiple of 15 times, which is in line with its peers.

Synergies and Benefits claimed :
The acquisition will broaden GE’s offerings for aviation customers by adding Smiths
innovative flight management systems, electrical power management, mechanical
actuation systems and airborne platform computing systems to GE Aviation’s
commercial and military aircraft engines and related services.
“This acquisition is consistent with our strategy to invest in high-technology
infrastructure businesses that deliver strong growth, earnings expansion and
higher margins,” Immelt said. “GE Aviation is growing about 10% a year and this
acquisition gives us a technology growth platform that will be accretive to our net
income and will deliver immediate and future value for our investors.”
GE Aviation President and CEO Scott Donnelly said, “The acquisition will broaden
our collective expertise. Smiths has made significant investments in its aerospace
technologies with resulting success on several exciting new aircraft. Together, we
will bring greater product scope and value to our customers.”
Financing of the deal
General Electric will finance the deal from its reserve and surplus.
Advisors to the Buyer and Sellers
Smiths financial advisors in the deal were Evercore Partners Limited, as well as
Credit Suisse Securities (Europe) Limited and JPMorgan Cazenove Limited.
Brunswick is their PR adviser.
Subsequent Performance
Smiths shares rose 109.50 pence to £10.945 in London after the company said it
planned to return £2.1 billion, or $4.1 billion, to shareholders. GE shares fell 3 cents
to $37.89 .
Smiths aerospace has been doing really after the acquisition by GE. Some
highlights after the deal are shown below.
Smiths Aerospace awarded Performance Based Logistics C-130J\K contract
worth $52m
Smiths Aerospace and Boeing reach milestone in successful refueling hose
deployment for KC-767 Italian Tanker
Smiths Aerospace partners with HCL to open development centre in India
Smiths Aerospace grows engine components business in North Carolina

WILTON, CONNECTICUT (November 24, 2004): GE Infrastructure, a unit of General Electric
Company (NYSE:GE), and Ionics, Inc. (NYSE:ION) announced today that they have signed a
definitive agreement for GE's acquisition of Ionics.
Ionics is a global leader in desalination, water reuse & recycling, and industrial ultrapure water
services. Ionics will join GE Infrastructure’s Water & Process Technologies business unit upon
completion of the transaction. Ionics, headquartered in Watertown, Mass., is a global leader in
water purification and wastewater treatment. The Company has over 50 years of experience in
the design, installation, operation and maintenance of water and wastewater treatment systems
and is a leading provider of emergency and long-term water purification services. More
membrane-based desalination systems have been designed and built by Ionics than any other
supplier worldwide. Ionics is also a leader in supplying zero-liquid-discharge systems, in
providing ultrapure water systems for the power and microelectronics industries, and in the
measurement and analysis of water impurities
GE Infrastructure, headquartered in Wilton, Conn., is a high-technology platform, comprised of
some of GE's fastest-growing businesses, including the Security and Water & Process
Technologies platforms. These global businesses offer a set of infrastructure protection and
productivity solutions to some of the most pressing issues that industries face.
Ionics have signed a definitive agreement for GE's acquisition in an all cash merger for $44 per
share, valuing the transaction at approximately $1.1 billion plus the assumption of existing debt.
Synergies and Benefits claimed:
“Water is the lifeblood of industries and communities around the world, and scarcity, increasing
demand and rising costs are driving the need to conserve, reuse and identify new supplies of this
essential resource,” said Bill Woodburn, President and CEO of GE Infrastructure. “The
combination of Ionics’ technology, project experience, and services network with GE’s operating
and project finance expertise will accelerate the development of technology solutions for the
global water purification segment. We see significant revenue and cost synergies that will enable
us to focus our resources on developing technologies that increase access to safe drinking water
and provide industrial customers with greater access to ultrapure water sources."
Doug Brown, CEO of Ionics said, “Through this merger we create the opportunity to serve our
industrial and municipal customers in new and exciting ways. Both GE and Ionics are focused on
building the water services business. By combining our technology with GE’s and by accessing
GE’s financial expertise and world class international organization, we substantially enhance our
ability to deliver our water purification services globally.”
George Oliver, GE Infrastructure’s President of Water & Process Technologies said, “This
acquisition strengthens GE’s commitment to people, technology and solutions. There are great
synergies between the two companies – GE currently has more than 2,000 scientists and
engineers focused on improving water quality for industrial and commercial use, and the addition
of Ionics expands our ability to provide solutions to our customers’ most pressing water needs.
Ionics has established technologies, engineering resources and global desalination management
capabilities that gives GE a significant presence in the potable water segment.
“Because Ionics utilizes multiple technologies for its emergency mobile fleet, we will be able to
offer expanded services for our industrial customers who need immediate assistance treating
their water supply,” Oliver said. “The acquisition of Ionics reinforces our commitment to our
customers by providing the services they need to remain productive and profitable.”
Structuring of the deal
General Electric has bought Ionics in an all cash deal.
Financing of the deal
General Electric will finance the deal from its reserve and surplus.

Advisors to the Buyer and Sellers
Goldman, Sachs & Co. and UBS Investment Bank acted as financial advisors to Ionics.
Subsequent Performance


General Electric Co. agreed to buy Zenon Environmental Inc. for C$760 million ($655 million),
its second purchase of a water-filtration company in the past year on March 14, 2007.
ZENON is the world's largest manufacturer and system integrator of hollow fiber
membrane technologies and complimentary products. Since its inception in 1980,
ZENON has repeatedly demonstrated through hundreds of installations in more
than 45 countries, that its products and people have the proven experience to treat
virtually any water source.
ZENON employs over 1,400 skilled people around the world, each dedicated to
continuously improving our membrane technology, our systems, and our services—
ensuring that our customers can always rely on us for the best the industry has to
To meet global demand for our products, ZENON operates two state-of-the-art
manufacturing plants, one in Canada and one in Hungary, which have the potential
to generate the world's highest hollow fiber membrane output.
GE, the world's second-biggest company by market value, will pay C$24 in cash for
each outstanding share of Oakville, Ontario-based Zenon, the companies said in a
statement today. Fairfield, Connecticut-based General Electric is paying 55 percent
more than Zenon's share price of C$15.50 in Toronto trading yesterday.
Synergies and Benefits claimed :
The purchase of Zenon, whose products are used to filter water for municipal and
agricultural use, will help GE boost revenue from its water-treatment unit about 25
percent to almost $2.5 billion next year, the company said. GE entered the industry
in 2002 and last year paid a 48 percent premium for Ionics Inc. to add desalination
and industrial customers.
``This is a good deal for GE,'' said Steven Isenberg, chief executive officer of M
Capital Partners Inc. in Toronto, which owns about 10,000 Zenon shares. ``Water is
an important new business for them.''
GE's water unit, based in Trevose, Pennsylvania, specializes in reverse osmosis
technology, which removes dissolved solids, such as salt, from water. Zenon's
products add to that line and give GE ``greater market share,'' said Michael
Gaugler, an analyst who follows water companies for Boenning & Scattergood Inc.
in West Conchohocken, Pennsylvania.

Financing of the deal
General Electric will finance the deal from its reserve and surplus.

Advisors to the Buyer and Sellers

Smiths financial advisors in the deal were Evercore Partners Limited, as well as
Credit Suisse Securities (Europe) Limited and JPMorgan Cazenove Limited.
Brunswick is their PR adviser.

Subsequent Performance
Shares of Zenon traded as high as C$27.10 in July before sliding in recent months
as changes to its manufacturing slowed production. They rose C$8.28 to C$23.78 in
General Electric shares rose 11 cents to $33.78 at 4:16 p.m. in New York Stock
Exchange composite trading. They have declined 6.7 percent in the past year.

Grasim's Acquisition of L&T Cement Business - Case Study

1. Initial Contacts and Discussion
All the talks about Grasim , the flagship company of the Aditya Birla Group, a leading
Indian business conglomerate showing keen interest in L&T started way back in Nov
2001. Kumar Mangalam Birla always wanted to become a major player in cement
industry in India and worldwide.
1.1 Reliance out, Grasim in
First step in order to fulfill his dreams began with acquiring of 10% stake of Reliance in
L&T (Larsen and Toubro) for INR 766.5 crore. There seemed to be some planning
behind this exchange of stocks between Reliance and Grasim because the Reliance
Group (Reliance), which held 3.92% in L&T in September 2001, had increased its stake
to 10.05% by November 2001, by acquiring over 15.8 million shares from the market.
Reliance sold this entire stake to Grasim at Rs 306.60 per share, at a premium of 47%
over the prevailing market price of Rs 208.50. Thus, since late‐2001, Grasim had
acquired over 15% stake in L&T and had also made an open offer to L&T shareholders
to further increase its stake.
The deal seems to be a win‐win situation for the three entities concerned. Although
Grasim and L&T have their fingers in many business pies, cement is the prime cash
driver for both companies. The combine becomes the largest player in the cement
sector, overtaking the Gujarat Ambuja‐ACC pairing. For Reliance, the deal translates to
exiting from a non‐core business at a hefty profit and the inflow of much‐needed cash to
fund some of its ongoing capital projects. In one stroke, Grasim has catapulted to the
top spot in the cement sector as well as stalled the possible entry of an international
major. Grasim is also expected to gain market leadership in the eastern, southern and
western markets through this association; the Ambuja‐ACC combine will still rule the
roost in the north, though.
1.2 Grasim’s first intermediate open offer
In May 2002, Grasim further acquired a stake of 2.84% in L&T from the open market,
taking its overall holding to 12.89%. These shares were purchased at prices ranging
between Rs 175 to Rs 180.
Justifying the above move, Grasimʹs President and Chief Financial Officer, D D Rathi,
said that since the company had surplus cash with no immediate investment plans,
increasing the stake in L&T seemed to be a good opportunity. The decline in the value
of L&T stock since September 2001 had also induced Grasim into buying L&T shares.
Industry observers however already had commented that there was a lot more behind
Grasimʹs move than the strategic investment angle. They alleged that” Grasim was trying
to make a ʹbackdoor entryʹ to take control in L&T”.
1.3 L&T’s kneejerk reaction
This increase of stake of Grasim caused some uneasiness in the power circles of L&T.
They tried to protect L&T from the possible takeover by Grasim Industries Limited by
announcing new plans for cement division, L&T cement. In October 2002, Larsen &
Toubro Ltd. (L&T), announced plans to spin off (demerge) its cement unit into a
separate company. It was told that L&T was thinking of demerger for the past 3 years
and not because of imminent threat posed by Grasim. The reason given was that,
though the cement division generated 26% of the groupʹs revenues, it consumed over 75% of
its total investments.
As per the demerger plan, called the Structural Demerger, it was ruled that L&T along
with financial institutions (FIs) would hold 76% in the new cement company, while the
remaining 24% would be distributed among the existing shareholders of L&T. L&T
would later sell 6% of its share to the FIs, retain the control in the company for the
following 4 or 5 years and subsequently, sell half of the 70% stake to a strategic partner.
Grasimʹs stake in the cement business would come down to 3.75%, if L&Tʹs demerger
plan went through. Since Grasim had spent over Rs 10 billion in acquiring its L&T
stake, it was not ready to let go off the latterʹs cement business (one of its own core

Grasim therefore charged that L&T, through the demerger plan, was trying to retain
control of the business division with itself, without focusing on overall shareholdersʹ
interests. Grasim claimed that under L&Tʹs demerger plan, L&T shareholders would
only get a 24% stake in the new cement company, as a result of which individual
shareholders would not have much control over the new cement company
1.4 Grasim’s Proposal Announcement
Grasim came out with an alternate vertical demerger plan in November 2002.
According to this plan, the cement unit was to be demerged into a separate entity which
would be listed on the stock exchanges.
All L&T shareholders including the Aditya Birla Group would get shares in the new
company. However, L&T, as a company, would not hold anything. Reportedly, the
relationship between the board members of Grasim and L&T also became increasingly
hostile. L&T and Grasim nominees on the L&T board were resorting to ʹmutual fault
While other directors blamed Grasim for insider trading, Grasim nominees blamed the
other board members for the ʹbelow par performance of L&T in 2002 (the company had
reported a profit of Rs 188.9 million for the quarter ended June 2002, as compared to Rs
651 million for the same period in 2001).
1.5 Grasim’s intermediate unsuccessful open offer
The open offer at Rs 190 per share by Grasim to acquire 20% stake in L&T was put on
hold by the Securities Exchange Board of India (SEBI) pending investigations into the
deal including ʺchange in controlʹʹ. As soon as the open offer was announced, there was
a widespread, and well‐founded, view that the price was low. In general, in takeover
situations, the premium for corporate control has been anywhere between 100 per cent
and 150 per cent of the market price levels in most deals of consequence. Significantly,
Grasim had paid Rs 306.6 per share to Reliance to pick up its initial stake of slightly
more than 10 per cent.
1.6 Twist in the Tale: L&T’s new maneuver
In December 2002, L&T announced that it was considering the proposal made by
Commonwealth Development Corporation (CDC), a UK based company, to invest in its
cement business.
Under this proposal, CDC was to subscribe to optionally convertible debentures of
L&Tʹs demerged cement business and with an option to convert the debentures into
6.8% equity stake by December 2004. If CDC decided to hold on to the debentures, it
could redeem them in three equal installments between 2004 and 2007. According to a
clause in CDCʹs proposal, CDC would convert the debentures into equity only when the
share price of the demerged cement company reached a specific price, called the strike price. The strike price was fixed as Rs 158 per share. Another clause in CDC's proposal stated that L&T required the approval of CDC if it wanted to come out with an initial public offering (IPO) for the cement business.

Comments from both sides
We are not the buyer who would naturally look for the lowest valuations. We are the seller
looking for the best valuations. As a seller, getting funds at the current time at the best future
valuations is what the shareholder is looking for and that is what L&T has done.ʺ
‐ An L&T spokesman, speaking in favor of potential buyer CDCʹs proposal, in
December 2002.
ʺIt is obvious that the whole purpose of this exercise is to create confusion in the minds of the
shareholders of L&T and change the very structure of the target company, L&T, so that essential
features of our clientsʹ offer would be greatly prejudiced and jeopardized.ʺ
‐ Grasimʹs solicitors, commenting on L&Tʹs demerger proposal, in December 2002

2. Acquisition Announcement
6 July, 2004
L&T completes cement restructuring; Grasim acquires majority stake in UltraTech
Larsen & Toubro Limited (L&T) and Grasim Industries Limited (Grasim) today
announced that the implementation process of the demerger of the cement division of
L&T has been completed, and Grasim has acquired majority stake in UltraTech CemCo
Limited (UltraTech), the demerged cement business of L&T.
The scheme of arrangement for the demerger of the cement business, sanctioned by the
Honorable High Court of Bombay, became effective from Friday, 14 May, 2004.
Accordingly, the cement business undertaking was transferred to and vested in
UltraTech CemCo Limited.
Grasim had made a successful open offer bid for 30 per cent of the equity of UltraTech
with a view of taking management control. Concurrently, Grasim acquired 8.5 per cent
equity stake of UltraTech from L&T, and Grasim and its associates have sold 14.95 per
cent of their holding in the demerged L&T to the L&T Employee Welfare Foundation.
Speaking on the occasion, Mr. A.M. Naik, Chairman & Managing Director, L&T, said
ʺThis transaction, one of the biggest in corporate India, has helped to unlock value for
its shareholders and position the demerged L&T as a more focused engineering and
construction co.ʺ
Says Mr. Kumar Mangalam Birla, Chairman, The Aditya Birla Group, ʺThis transaction
reflects our commitment to build a leadership position in cement. We believe that it will
take about two to three years for UltraTech to provide a competitive return on the
aggressive price offered to its shareholders.ʺ
The transaction is expected to provide UltraTech an opportunity to leverage synergies
with Grasim and strengthen their ability to compete in the Indian and overseas markets.

3. Valuation

As per the open offer price of Rs346 per share, EV/ton worked out to US$83 per ton of
capacity (US$105 per ton of production). This was at a 15% premium to ACC and 32%
discount to GACL valuations.
GACL was the most efficient player in the cement industry, which justified its premium
valuation. At the offer price of Rs346, Grasim was offering to pay US$83 per ton for its
stake in UCL. Part of this premium could be attributed to a premium for acquiring
controlling stake in the company through the offer. The listing price however would not
include a ‘Control Premium’ and was likely to be lower than the offer price.
Based on operational parameters, Cemcos was expected to trade at a discount to Gujarat
Ambuja as well as ACC on listing. Its EBIDTA margins were lower than both its peers.
ROCE was a low 4%. EV/EBIDTA at 15.4x is on the higher side as compared to ACC
(14.6) and Gujarat Ambuja (15.4).
Based on an EV/Ton of US$70 (2.5% discount to ACC), the fair price worked out to
Rs293 per share. Even if Cemco managed to get a valuation similar to ACC at US$72 per
ton, fair price works out to Rs306.

4. Synergies Claimed
• The geographical overlap is not significant and this may offer logistical
advantages (freight costs) in manufacturing and catering to different markets.
• L&Tʹs brand equity is strong across the country and its product commands a
slightly higher price.
• The capacities of L&T and Grasim are fairly contemporary as both have grown
their cement businesses through the 1990s.
• This should be a big plus in an environment where volumes and efficiencies are
becoming the earnings driver and the key for `survivalʹ in cement.
• According to Mr K Birla there would be Rs 100 crore savings between the two
companies on account of savings in logistics and procurement.

5. Steps Subsequent to announcement of the deal
5.1 Stock Exchange Listing
Immediately after the takeover the new entity named, “Ultratech Cement Company”
was listed on the Bombay stock exchange.
5.2 Setting Up of New Board
The new board for the company was set up , including two nominees from the
institutions, two from L&T — Mr. Naik and Deosthale, four from Grasim, namely,
Rajashree Birla, Kumaramangalam Birla, S. Mishra (Corporate & HR Director, Grasim)
and D. D. Rathi. There are also two independent directors — R. C. Bhargava (former
Managing Direcor, Maruti Udyog) and Arun Gandhi (Tata Sons). Saurabh Mishra was
appointed the Chief Executive Officer of UTCC. Both Ms. Rajashree Birla and Mr.
Kumarmangalam Birla will step down from the board of L&T.
5.3 Rebranding
Grasim was having cement brands like Birla plus and Birla super in the 150 mn TPA
Cement market in India. L&T was a leading brand in the premium segment of the
cement market. The acquisition gave Grasim an entry into the premium segment of the
L&T cement which enjoyed leadership position in the premium cement market
epitomized engineering prowess, technology quality and modernity. This has enabled
the brand to command a premium over the other cement brands. Grasim was allowed 8
months to use the L&T brand.
Grasim was faced with a tough task. The time was short and there were two choices,
merge the L&T brand with existing Grasim brands or launch a new brand. The
company decided on the later and did it with style.
The name Ultratech was chosen after careful marketing research. Since L&T does not
mean anything by virtue of the brand name, Grasim wanted the new brandname to
portray significant intrinsic value of the brand. Hence the name Ultratech was chosen.
Since Grasim didnot want to dilute the premiumness that L&T enjoyed, a high decibel
ad blitz was launched to announce that L&T is now Ultratech. The campaigns was
backed with direct marketing where the company officials met the 5500 odd stockists
and authorised dealers explaining the brand and company policies.

Cement is basically viewed as a commodity and the industry is fragmented with
around 50 players. So inorder to command a premium, the brand had to show a
significant differentiation.

Ultratech was positioned as the ʹ Engineerʹs choiceʺ cement emphasizing on the
qualities such as Quality, Modernity and technology. The gamble has paid off well for
Aditya Birla group and Ultratech was able to carry the legacy of L&T cement.
6. Structuring of Deal
• Shareholders of L&T as on May 27, 2004 were entitled to 5 shares of the L&T
Engineering (Face value Rs2) and 4 shares of UCL (Face value Rs 10) for every 10
shares held in erstwhile L&T Ltd. Prior to merger Grasim held 12.6% in UCL.
• L&T transferred as promised 8.5% of its holding in UCL to Grasim at the open
Offer price, enabling Grasim to acquire a controlling 51.1% stake in UCL.
• Grasim successfully made an open offer to the shareholders of UCL to acquire
upto 30% of the stake at Rs342.6 per share.
• In addition, Rs3 per share were to be paid out of the interest on the money
deposited in the escrow account (Rs12.6bn) for the open offer. This meant a final
price of Rs346 per share was on offer to all those tendering their shares in the
open offer. The offer had opened on June 7 and closed on June 21 2004.
• Grasim Industries had arrived at an informal understanding with Larsen &
Toubro to offload 14.95 per cent out of the 15.74 per cent stake it holds in the
engineering company to L&Tʹs employeesʹ trust. According to the arrangement,
Grasim, following the demerger of L&Tʹs cement business, sold the stake to the
L&T employeesʹ trust at Rs 120 per share.

7. Financing of Deal
• Grasim Industries acquired 8.5% equity of L&T in the new cement company.
Total investment outlay was around 362 crore.
• Grasim made an open offer for 30% equity stake. Total Investment outlay at Rs.
1278 crore.
• Grasim sold its entire existing holding in L&T’s non‐cement (engineering and
other business) at Rs. 120 per share. Total cash inflow for Grasim at around Rs.
470 crore.
• Net cash outflow for Grasim on this deal will be Rs. 1170 crores. Total investment
for Grasim (including its earlier purchase from Reliance and open market of Rs.
1020 crore) around Rs 2190 crore on this deal
• The Rs. 2,200 Crore required for entire deal was funded from internal accruals of
Grasim Industries.
• This internally funded Rs.2,200 Crores transaction is the largest of its kind cash
8. Closure of the Deal
• Shareholders and Creditors of L&T approved the Scheme on 3rd Feb. 2004
• High Court approved the Scheme of Arrangement on 22nd April 2004
• Grasim deposited balance 90% of Open Offer consideration with Escrow Agent;
Total amount deposited Rs.1,279 Crs
• The scheme of arrangement for the demerger of the cement business, sanctioned
by the Honorable High Court of Bombay, became effective from Friday, 14 May,
• Accordingly, the cement business undertaking was transferred to and vested in
UltraTech CemCo Limited.

9. Subsequent performance
• ULTRATECH CemCo Ltd had reported a net loss of Rs 2.3 crore for the second
quarter and a net loss of Rs 3.3 crore for the half‐year ended September 30, 2004,
in its first reported results since its listing on the stock exchanges
The companyʹs performance has been constrained because of input costs, mainly
those of power and fuel, said a company release.
• Grasim increased exports with increase in capacity. Grasim Industries have
reported increased shipments, year‐on‐year, for both Grasim Cement as well as
UltraTech Cemco Ltd. Despatches at Grasim Cement moved up 12.54 per cent
from the year‐ago despatch quantity, amounting to 11.37 lakh tonnes. Production
increased 14.36 per cent to 11.61 lakh t.
• HIGHER sales volumes and realisations in all of its businesses have helped
Grasim Industries report a 68 per cent increase in net profit for the quarter ended
June 30, 2004. Net profit for the quarter amounted to Rs 219 crore, up from Rs
130.5 crore reported for the corresponding quarter of the previous year.
• UltraTech draws up Rs 200‐cr capex plan (Q2 2004) for the next two years that
would generate around 2.5 million tonnes of capacity through debottlenecking
and reduction of the companyʹs debt equity ratio.
• Subsequently as a result, Ultra Tech Cement reported a 76 per cent rise in net
profit at US$ 56.65 million in the last quarter of 2006‐07. Its sale of cement stood
at 3.57 mn. tons and clinker at 0.77 mn. tons. Domestic cement realisations at
Rs.3,019 per ton increased by 50 per cent. Net profit grew by 573 per cent from
Rs.32 crore to Rs.214 crore.
10. Advisors to Deal
Advisor to Grasim was Enam Securities. They helped them with valuation of company.
Transaction advisor for the deal was JM Morgan Stanley and Mulla and Mulla group
was the legal advisor.
BCG group was the advisor of L&T for a very long time. They were advised by BCG as
early as 1999 to come out of cement business gradually and focus on their more
profitable engineering and defense business.
ICRA was the valuation advisory for L&T.

11. References


Vodafone Mannesmann - Case Study

Yogesh Joshi, Suhas Kabra, Amit Satbhai, Rashi Munshi (PGDIE, NITIE)

Vodafone’s made a hostile takeover bid for Mannesmann in 1999.

Vodafone Group Plc is a mobile network operator headquartered in Newbury, Berkshire, England, UK. It is the largest mobile telecommunications network company in the world by turnover and has a market value of about £84.7 billion (July 2007). Vodafone currently has equity interests in 27 countries and Partner Networks (networks in which it has no equity stake) in a further 40 countries. At 31 January 2007 Vodafone had 200 million proportionate customers in 27 markets across 5 continents. The company is involved in the operation of mobile telecommunication networks and the provision of related telecommunication services. The company’s principal business is the operation of the cellular radio networks.

Mannesmann AG (“Mannesmann”) is a German-based engineering and telecommunications company. Its’ core activities in the telecommunications sector relate to mobile and fixed line telephony. It has interests in joint ventures in France, and Austria and owns businesses in Germany, Italy, the United Kingdom and the USA.

Initial Discussions:
In the year 1999 telecom industry was opening up for competition. It was forecasted that telecoms revenue will rise from about £650bn in 1996 to about £1.2trillion in 2002. At the same time as technology was making rapid progress, markets everywhere are opening up to competition. The spread opened up many more opportunities for large and small companies and a search by big players for company alliances worldwide to compete with newcomers. Analysts had expected the UK's leading mobile phone operator, Vodafone, to bid for Mannesmann, as merger fever spread. At that time German engineering giant Mannesmann was hoping to cash in on the expanding markets by setting up its telecoms subsidiary as a separate company. Vodafone itself won a transatlantic bidding war in January to snap up US firm AirTouch Communications for £37bn, the biggest deal struck by a UK firm, creating Vodafone Airtouch. Vodafone Chief Executive Chris Gent said at the time that the intention was to create "a Microsoft of mobile phones". The new company serves more than 24 million mobile customers on four continents. A takeover of Mannesmann would give Vodafone control of mobile operations in Germany, France and Italy and strengthen its position as the world's largest mobile phone company. According to a report in Wall street journal Vodafone AirTouch was moving ahead with plans to mount a hostile bid for German telecoms and engineering group Mannesmann. The deal was expected to value the pair together at more than $100bn.

Earlier, Vodafone Airtouch was said to be planning a joint bid with France Telecom for Mannesmann. The speculation followed Mannesmann's £19bn bid for UK mobile telecom company, Orange. Vodafone Airtouch has long been a suitor of Mannesmann and the German company hoped that buying Orange would place it outside of Vodafone Airtouch's reach. This hope was based on the belief that UK competition rules would not allow Vodafone Airtouch to own two mobile operations. Analysts said the logic of a joint Vodafone/France Telecom deal is strong. France Telecom would buy Orange, while Vodafone would buy Mannesmann's other assets, in particular its German and Italian mobile operations.
Analysts View:
“A bid would be unwelcome and, given Mannesmann's company structure, it may be difficult to launch a hostile takeover.” “Mannesmann company rules limit individual shareholders' voting rights to a maximum 5% tranche, even if they hold a larger block of shares” "Because of Mannesmann's structure, it is very difficult to launch a hostile takeover. So one will have to wait for a comment from the companies involved to see whether a friendly agreement would be an option" “Mannesmann is too proud to accept a takeover." “Contested takeovers are rare in Germany.” “if Mannesmann bought Orange it would put it out of the price range of potential buyers, such as Vodafone Airtouch.” “Vodafone would also face difficulties in mounting a hostile bid in Germany, where competition law is tough on such deals.”

In Nov 1999 Vodafone offered to exchange 43.7 of its shares for each Mannesmann share with no cash added. This was estimated to be worth up to £65bn, was rejected by the German company
Then Vodafone initiated a hostile takeover and proposed a stock swap whereby each Mannesmann share would be exchanged for 53.7 Vodafone shares. Vodafone would issue 27.8 billion new shares and, with 517.9 million Mannesmann shares outstanding, Mannesmann would then own 47.2% of the combined entity. The Vodafone offer had been estimated to be worth up to £75bn. Vodafone had been tipped to make an offer for Mannesmann ever since the German company announced a deal to buy UK Company Orange. The German telecommunications giant Mannesmann rejected the takeover bid, Mannesmann's board said the offer did not contain a cash offer and was unattractive to shareholders. According to them offer was “wholly inadequate”. There was no immediate comment from Vodafone. The stock market was on tenterhooks, awaiting news of the expected move when Vodafone releases its half-year financial results. Vodafone may have to lift its offer for Mannesmann to win shareholders over in what would be the world's biggest ever hostile takeover battle. Investors were worried about the prospect of Vodafone paying over the odds and shares in the company slipped 3.75p to 292.5p on Monday. Shares in Mannesmann rose 17.68 euros (£11.24) to 202.98 euros (£129) on the German stock market.

On 19 Nov 1999, Vodafone launched a £79bn (124bn euro) hostile takeover bid for German mobile phone company Mannesmann followed by Mannesmann's rejection of a friendly merger offer. Which is set to be the world's biggest ever contested takeover battle till date.
Value offered per share: €240
No. of Shares Outstanding: 0.5179 billion Total value of the company: €240 X 0.5179 billion ≈ €124 b

If successful this would result in Mannesmann shareholders owning 47% of the combined group. The offer represented a 20% increase on Vodafone's initial bid. This estimate excludes the value of Orange PLC, since Mannesmann’s offer to Orange was not yet bounded.

Synergies Claimed:

 Deal would turn Vodafone AirTouch into the world's biggest mobile phone company. The offer would create an unmatched European mobile phone network, and a global brand. The merger would generate savings of more than £1bn by 2004. The deal would add the UK to Mannesmann's existing mobile businesses in Germany, France and Italy. A merger would create a company with mobile phone interests in 15 European countries with 30 million customers. Worldwide the group would have the equivalent of 42 million customers. Deal would enable data business via mobile phones. If Vodafone succeeds in its bid, the combined group could be worth around £200bn - or nearly 17% of the value of the whole of London's top 100 companies. Merger would allow savings of £500m in 2003 and £600m in 2004.

Steps subsequent to announcement of the deal:

On Nov 19, 1999 Vodafone AirTouch launched a £79bn (124bn euro) bid for German group Mannesmann, Mannemann has already made clear in a letter that it wants the company to withdraw the bid. Managing director of Mannesmann said: "Jointly with Orange, Mannesmann will be an outstanding company and better positioned than Vodafone for the future opportunities in the telecom business. The combination of Orange and Mannesmann is, in my opinion, very powerful and offers the best opportunity for Hutchison's shareholders." Mannesmann then planned to build on its telecoms strength and bring forward the flotation of its engineering and automotive business to the middle of next year, one year earlier than expected. It will cut its stake in the engineering/automotive unit to under 50%. Mannesmann rejected the takeover bid bf $125bn by Vodafone-Airtouch. The decision came at a meeting of Mannesmann's supervisory board in Duesseldorf, setting the scene for Vodafone to proceed with the world's biggest-ever takeover ever by putting its offer directly to shareholders.
Meanwhile, Mannesmann continued to try to strengthen its defences by entering into talks with France's Vivendi about acquiring a majority stake in Cegetel, France's second-largest mobile phone operator. That would give Mannesmann control of the number one or number two mobile phone company in Europe's four biggest markets - France, Germany, Italy and the UK. On Dec 23, 1999 Vodafone launched launch an £83bn hostile bid for the company On Jan 30th, 2000 Vodafone announced plans to set up Europe's first integrated telecommunications and internet operation, which will be linked with French firm Vivendi. Vodafone's raised the deal on Feb 2, 2000, to now worth £90bn ($150bn), would have given Mannesmann 48% of the combined group. Shares in Mannesmann have risen 119% since October. On Feb 2, 2000 they reached a new high of 310 euros, ahead of Vodafone's 300 euro offer. Vodafone AirTouch showed a killer instinct in putting together the resulting £112bn ($182bn) deal. Vodafone AirTouch and Mannesmann have agreed terms for a friendly merger. The Mannesmann directors are said to be about to approve the deal, according to sources close to the companies. It is understood they are haggling over the fine detail before making an announcement. Under the terms of the £112bn ($182bn) deal, Mannesmann shareholders are expected to get 49.5% of the merged company, with Vodafone providing 59 of its shares for each Mannesmann share. Vodafone AirTouch has finally succeeded in taking control of Mannesmann after last-minute concessions overcame the objections of the German group's board on Feb 10, 2000.

Structuring of the deal: Implications

The structure of the deal suggests that Vodafone’s management wants to share the risk of achieving the synergies with Mannesmann’s shareholders, (as well as the understandable limitation of raising a 86 B₤ for an all cash deal.) For Vodafone’s shareholders this is a worthwhile deal to take; It suggests tremendous market synergies and prevents increased competition in the UK. In addition, partnerships that Vodafone has with Mannesmann in other European markets are very valuable. If the deal is not accepted Vodafone and Mannesmann would become competitors throughout Europe and the companies may become less valuable than before the merger was proposed.

Hurdles Vodafone Must Overcome to Acquire Mannesmann

A large number of Mannesmann’s board members are employees and union representative which will make it difficult for Vodafone to get the boards approval. In addition, even if Vodafone get the required number of shares to take over Mannesmann (75%), the voting restrictions placed on large shareholders of Mannesmann may prevent it from taking control. If this is the case, it may have to wait until June 2000 to replace the board and take control of management. The merger may also be complicated by anti-competitive regulations. Since Mannesmann acquired Orange, the UK government may appose the deal unless it agrees to spin-it off, which it has. Companies such as D2 and SFR, which are jointly owned by Vodafone and Mannesmann, will support the merger because if it fails, Vodafone and Mannesmann will become competitors and this would complicate joint operations. In addition, the merger will be supported by Vodafone shareholders because it would expand Vodafone’s global presence, and provide the company with significant synergies and a strong U.K presence. Hutchison Wampoa and Mannesmann’s shareholders, except those who are employees, should also support the merger because it would provide them with a significant return. The groups that would appose the merger include Mannesmann’s employees, Mannesmann’s unions and the German Government as they will be concerned about job losses. Mannesmann’s board is also likely to reject the merger since 50% of its supervisory board is controlled by employees and union representatives.

Gent’s Support for the Vodafone-Mannesmann Acquisition and Esser’s Resistance

The Vodafone-Mannesmann battle is a clear example of principle-agent problems that can arise when a company’s management does not have the same objectives as the company’s shareholders. Since Gent has stock options in Vodafone, would remain in control of company and would receive a large bonus, he is in support of the merger. Esser on the other hand does not have a large equity interest in Mannesmann, he would not receive a large pay-out and he would not likely be retained in the company. Therefore, he is opposed to the deal.
Hostile Takeovers and the Battle between Vodafone and Mannesmann
In the market for corporate control hostile takeovers play an important role. Hostile takeovers are a mechanism to remove incumbent managers, induce corporate restructuring, and free up resources that could be used more efficiently elsewhere. The threat of a hostile takeover also improves management’s performance. Most importantly

however is that hostile takeovers are a mechanism to deal with poor corporate governance structures that do not act in the best interest of shareholders

Mannesmann is a German based company and as such it has a supervisory board and a management board. The supervisory board appoints and dismissed members of the management board while the management board runs the day to day operations of the company. Since the company has over 2000 employees, the supervisory board will consisted of 10 shareholders, 7 members from the workforce and three members from trade unions. Even thought the shareholders may have wanted Mannesmann’s management to accept the Vodafone offer, the board was unlikely to force them to do so since the supervisory board had a large number of employees and union members on it. A hostile takeover by Vodafone would remove this board and force the company to accept the deal. In contrast to the German corporate governance system, the Anglo Saxon system has only one tier. The board members are elected by the shareholders, are known for their business abilities and usually have a vested interest in the company. Although the number of directors can vary substantially between companies, at least 50% need to be independent. As a result, Anglo-Saxon boards are more likely to act in the best interest of their shareholders since their interests are aligned.

Financing of the Deal:
Vodafone financed the bid by issuing bonds of approximately a 135 billion euro

Closure of the Deal:
Vodafone AirTouch was finally succeeded in taking control of Mannesmann. Under the terms of the revised £112bn deal, Mannesmann shareholders got 49.5% of the merged company, with Vodafone providing 58.96 of its shares for each Mannesmann share. The revised deal values Mannesmann shares at 353 euros each. This brought to an end months of rancorous negotiations, claims and counterclaims in a bidding battle mixing big business, politics and union uproar. The new company - which will have some 42 million customers - will be run from Vodafone's Newbury headquarters, although Mannesmann will continue to have a head office in Dusseldorf. The new company will be called Vodafone Airtouch, although the Mannesmann name will be retained in Germany. The total value of the Vodafone group on the stock market, after paying $183bn for Mannesmann in shares, will be $365bn (£228bn), making it by far the largest company on the London stock market and the fourth-largest in the world. The merger creates a huge IT group under Vodafone chief executive Chris Gent, with some 42 million customers and interests ranging from the Americas and Australia through the UK, France, Germany and Italy. However, Orange, which was bought last year by Mannesmann, will have to be put up for sale to satisfy competition regulators in the UK. Also Vodafone split off Mannesmann's engineering and automotive operations into a separate company.
The London Stock Exchange had announced special measures to deal with an anticipated avalanche of trade in Vodafone. Dealers had predicted a surge of demand as many index tracker funds were now permitted to buy the heavyweight stock to reflect the increased weighting the enlarged company will have in the FTSE 100 index. It is expected to account for about 15% of the index. The combined group will be Europe's telecommunications leader and the deal seals Vodafone's position as the world's major mobile telephone operator.



Acquisition of Betapharm by Dr. Reddy's Laboratories - Case Study

Kumar Devavrat, Jose Mannala, Mukesh Kumar, Somanshu Mallan (PGDIM 13, NITIE)

On February 15, 2006, Dr. Reddy's Laboratories Limited (DRL), a leading Indian pharmaceutical company, acquired the fourth-largest generic pharmaceutical company in Germany, Betapharm Arzneimittel GmbH (Betapharm) from the 3i Group PLC (3i) for US$570 million (€480 million). The sale deal also included the 'beta institut for sociomedical research GmbH' (beta Institut), a non-profit research institute founded and funded by betapharm to conduct research on issues related to social aspects of medicine and health management. The acquisition was hailed as the biggest overseas acquisition made by an Indian pharmaceutical company. The synergies from the acquisition were expected to benefit both DRL and Betapharm.
Stated above is the vision with which DRL went for the acquisition of Betapharm. This document will analyse Betapharms’s acquisition by DRL and try to answer the following questions:
• Understand and discuss the rationale behind the acquisition of Betapharm by Dr. Reddy's Laboratories.
• Detailed analysis of the case from M&A point of view.
Understand and appreciate the role of mergers and acquisitions as a growth strategy.
Initial contacts/discussions
Indian pharmaceuticals majors Ranbaxy, Wockhardt and Nicholas Piramal had also submitted bids to acquire Betapharm Arzneimittel in addition to global majors like Teva, Sandoz and certain Turkish companies, along with private equity players.
The Hyderabad-based company Dr. Reddy’s signed a definitive agreement with 3i, the private equity house that controls Betapharm, on Thursday, 16th February 2006, to
acquire 100 per cent equity of the German drug major. In a press release Dr Reddy's said the transaction, subject to customary closing conditions, was expected to close in the first week of March 2006.
At the time of acquisition Betapharm was highly profitable, with estimated EBITDA margin of 24-26%. With assumptions and available industry data, we have done a quick NPV valuation of betapharm and arrived at a value of €550-560 million (or Rs 380-400 per share) assuming WACC of 12% and a sustainable growth rate of 5%. The payback period is likely to be 6-7 years - ICICI Securities.
Analysts expected the betapharm acquisition to add $ 200 million to Dr Reddy's topline immediately and the company's shares jumped 9.38 percent to hit its 52-week high price on the Bombay Stock Exchange - Wednesday, March 15, 2006

Claimed Synergies from the Acquisition

Not only is Dr. Reddy's non-existent in Germany, but the market has deep-rooted sales and distribution networks that makes inorganic expansion there tough and expensive for an outsider. 2
- Saion Mukherjee, Research Analyst, Brics Securities,in July 2006
The synergies from the acquisition were expected to benefit both DRL and betapharm. Through this acquisition DRL could get immediate access to the German generic market, the second-largest generic market in the world after the US. Germany also accounted for 66 percent of the generic market in Europe (Refer to Exhibit I for a list of the major generic markets in Europe). The acquisition was expected to help DRL gain a strategic presence in the European market as the generic drug market in Europe was expected to show strong growth due to rising public healthcare costs.
It was also expected to help DRL realize its ambition of becoming a US$1 billion mid-size global pharmaceutical company by 2008. betapharm was expected to benefit from the acquisition as it would be able to add more products to its portfolio and grow at a much faster rate in Germany. Besides, the acquisition would help it to utilize DRL's global product development and marketing infrastructure to expand its presence in the European market in the long run. Dr. Wolfgang Niedermaier (Niedermaier), CEO of betapharm, commented, "Dr. Reddy's impressive pipeline of generic and innovative products and its high quality standards combined with competitive manufacturing costs will help further develop our position in the German market and offer an entry platform for the European market.
Its extensive and well-recognized corporate social responsibility activities perfectly fit with our successful corporate philosophy and business model. We see Dr. Reddy's as our partner of choice to build a successful joint future and continue betapharm's growth and success story."
Though DRL was not the highest bidder, it clinched the deal largely due to the perceived synergies between the two companies. DRL's strong commitment to corporate social responsibility (CSR) initiatives too helped swing the deal in its favor as betapharm identified with such initiatives through the activities conducted by beta Institut.
However, some analysts were of the opinion that DRL had paid too much to 3i for the acquisition as the value of the acquisition was estimated to be more than three times the annual sales of betapharm. Their argument was strengthened by the fact that another Indian pharmaceutical major, Ranbaxy Laboratories Limited7 (Ranbaxy), which had also aggressively competed for the acquisition and was a pre-sale favorite to bag the betapharm deal, pulled out at the last minute quoting the high price. DRL, however, justified the premium price saying that the advantages from the acquisition were manifold. A few also expressed their doubts as to whether DRL could leverage any benefits in the short term as betapharm was reportedly emerging from a lean period.

A few months after the acquisition, there were already early signs of trouble, as the Economic Optimisation of Pharmaceutical Care Act (AVWG) took effect in Germany on May 1, 2006. Though the act was expected to increase the scope for the use of generic drugs, it also put some price caps in place, which affected the margins of betapharm. Analysts opined that the payback to DRL from this acquisition would take a few years longer than previously expected. It was reported that DRL, which had plans for more acquisitions in Europe after the betapharm acquisition, had shelved its plans of any further acquisitions in Europe

Financing of the deal

DRL had its war chest ready with a $200 million cash and remaining debt arranged from domestic FIs. DRL funded the acquisition through a combination of internal accruals and borrowings.
Closure of the deal
Dr. Reddy's Laboratories, announced the completion of 100 per cent acquisition of Betapharm Group, Germany's fourth largest generic pharmaceutical firm, with a total enterprise value of 480 million Euros on Mar 07, 2006
Subsequent performance
Dr Reddy's share price shot up by 9.3% to close at Rs 1,281 on February 16, 2006, when it announced the $560 million Betapharm deal. Shares were trading higher at Rs 1,600 in early May.
With the German government reducing prices of drugs in the range of 10-20%, the pricing environment became a little negative for the company in the first quarter, and the returns were on the lower side in Sep 2006. Of late DRL’s subsidiary, betapharm, has returned to its usual sales levels at $51 million, and lower selling, general & administrative (SGA) expenses led to better-than-expected operating margin adjusted for one-off opportunities. Betapharm has achieved a 600 bps improvement in its active pharmaceutical ingredients (API) margins, which the management attributed to a better
product mix, citing Amlodipine Besylate as one of the key products being sold.

Advisors to the Buyer and Seller

Seller: 3i appointed Investment banks Sal Oppenheim and Bear Stearns to advise it.
Sal Oppenheim is one of the leading German investment banks for the domestic market, with a special focus on medium-sized companies and the public sector.
The Bear Stearns Companies Inc. (NYSE: BSC) is the parent company of Bear, Stearns & Co. Inc., a leading global investment banking, securities trading and brokerage firm.

Buyer: Freshfields Bruckhaus Deringer has advised company Dr. Reddy's on the acquisition of Betapharm.

Freshfields Bruckhaus Deringer is a leading international law firm. With over 2,400 lawyers in 27 offices around the world, they provide a comprehensive worldwide service to national and multinational corporations, financial institutions and governments.


2. www.bloomberg.com/news
3. www.nicholaspiramal.com/pressrelease
4. http://www.icmr.icfai.org/casestudies/catalogue/Business Strategy/BSTR249.htm
5. http://www.genengnews.com/news/bnitem.aspx?name=17622028

Acquisition of Repower by SUzlon - Case Study

Sharad Agrawal, Ashish Shiwalkar, Nilesh Jajoo, Varun Bhutani (PGDIM 13, NITIE), K.V.S.S. Narayana Rao


Announcement - India's Suzlon Energy completes REpower acquisition [1]

MUMBAI, June 2 (Reuters) - India's Suzlon Energy Ltd. said on Saturday it had completed the acquisition of German wind turbine maker REpower and controlled 87.1 percent along with France's Areva and Portugal's Martifer in the company.
On May 25, Suzlon had said it hoped to control 75 percent of REpower and become the world's fourth largest wind-tubrine maker, after rival Areva did not raise its bid for the German company.
Last week, Suzlon and Areva, which were locked in a battle over REpower, decided to jointly run the German firm, after both separately failed to get a majority stake in it.
Suzlon said in a statement it held 33.85 percent in REpower after acquiring 25.46 percent more during an extended offer period for REpower's shares that ended on May 25.
Areva is the second-largest shareholder in REpower with 30.15 percent, while Martifer, a unit of Portugal's top builder Mota Engil holds 23.08 percent.
Suzlon had offered 150 euros per REpower share, valuing the German firm at around 1.2 billion euros ($1.6 billion) while Areva, the world's biggest maker of nuclear power plants, did not raise its offer price from 140 euros per share.
While Areva has the option to sell its stake to Suzlon after one year, Martifer can sell its share within two years up to 265 million euros, also to Suzlon.

About Suzlon Energy Ltd. (BIDDER)[2]

Suzlon Energy , market leader in Asia and the world’s fifth largest wind turbine manufacturer in terms of market share, offers customers total wind power solutions including consultancy, R&D, manufacturing, operations & maintenance services. Not even on the list of the world’s Top 10 wind-turbine manufacturers as recently as 2002, Suzlon passed Siemens of Germany last year to become the fifth-largest producer by installed megawatts of capacity. It is surpassed only by the market leader, Vestas Wind Systems of Denmark, as well as General Electric, Enercon of Germany and Gamesa Tecnológica of Spain.

On the back of the globally increasing demand for wind energy and its competitive advantage of having control over its supply chain through backward integration Suzlon plans to further increase its global presence. Suzlon is India’s leading manufacturer of wind turbine generators and has successfully expanded into China, the United States, Belgium, Denmark, Australia and Germany. Last year, Suzlon acquired Hansen Transmissions in Belgium, a leading producer of gear-boxes. Suzlon plans to create 300 news jobs at Hansen during the following years.
Suzlon’s R&D centres are located in Germany, in the Netherlands and in India. The international business of Suzlon is managed by Suzlon Energy A/s out of Aarhus in Denmark, which in turn has country headquarters in Beijing, Chicago and Melbourne for China, United States and Australia respectively. The Group Management office of Suzlon is located in Amsterdam, the Netherlands. Suzlon’s quality systems have been certified by Det Norske Veritas (DNV), one of the leading global registrars of quality systems, as being in compliance with the requirements of ISO 9001:2000.

Suzlon’s Vision
o To be the technology leader in the wind industry
o To be among the top three wind energy companies in the world
o To be the most respected brand and preferred company for all stake holders
o To be the best team and best place to work
o To be the fastest growing and most profitable company in the sector
Key Strengths

o Vertically integrated global wind player offering comprehensive solutions covering R&D and manufacturing to EPC project delivery and operations & maintenance services
o Strategically structured global supply chain to serve high growth markets; leveraging low-cost economies for manufacturing and sourcing
o In-house manufacturing of critical components such as rotor blades, towers and control systems with control over the design and technology of gearboxes (Hansen) and generators (Elin)
o Strong track record in EPC delivery across the world; constructed some of the world’s largest wind farms with capacities ranging from 200 MW to over600 MW
o Strong balance sheet and the highest recurring end-year EBITDA margin in the wind industry (20%)
o Defined strategic focus

Strategic Focus

o Vertical Integration
o Focus on Key High Growth Markets
o Growth through M&A
o Cost Efficiency
o R&D and Innovation
o Focus on Customer Satisfaction

About Martifer Group

The Martifer Group[3] is the holding company of a portfolio of approximately 40 companies that are divided into five core business units: Construction, Retail & Warehousing, Energy Equipment, Bio fuels and Electricity Generation. With total sales of €148 million in 2005 and a workforce exceeding 1000, Martifer is one of the fastest growing companies in Europe. In order to fuel further growth, Martifer currently plans an IPO for the second quarter of 2007.

Since its establishment in 1990, Martifer Construções Metalomecânicas SA (Steel Construction) has had an average yearly growth of 30 per cent, making it the leading steel construction company in Iberia and one of the largest in Europe. The company has activities in Europe, South America and Africa. As the company expands internationally and diversifies its portfolio of businesses, its core focus remains on construction and energy production. With emphasis on both segments, Martifer continues to invest in regenerative energy sources, in particular wind energy. To this end, Martifer cooperates with the German REpower AG on a national level and holds a stake of 25.4% in the company. The group has an installed capacity of 140 towers per year.

About REpower[4] Systems (TARGET)

REpower is one of the leading players in the fast-growing worldwide wind energy sector, specializing in high output turbine technology particularly suitable for offshore turbines. The management of the company has forecasted revenues of EUR 450 million for 2006. Aside from being one of the leading players in its home market of Germany, REpower has established a strong presence in a number of key European markets and is pursuing promising development plans in China, India and the USA.

Rationale Behind the Acquisition

The partnership will create a combination poised for technological leadership in wind power solutions. Looking forward into the future the following benefits can be reaped from this strategic acquisition.

o REpower and Suzlon will together form the best team in the global wind energy industry
o The combination brings together strong R&D, excellent technology teams and access to European markets with a vertically integrated supply chain, global market reach, strong technology and manufacturing base and financial muscle
o The combination promises to be a technology powerhouse capable of delivering and sustaining high growth with high margins
o The REpower –Suzlon combination has the potential to become the world leader in wind power solutions
o The partnership will create the most reliable product with the best life cycle cost

Offer Price[5]

The minimum Offer Price to be offered to REPOWER Shareholders as minimum consideration for their REPOWER Shares is the higher of
• The weighted average domestic stock exchange price of the REPOWER Shares
during the three-month period prior to the announcement of the BIDDER’s intention to make this Offer on 9 February, and
• The highest price paid or agreed by BIDDER, a person acting in concert with
BIDDER or any of their subsidiaries for the acquisition of REPOWER Shares
during the six-month period prior to the publication of Offer Document.

The Three Month Average Price for the REPOWER Shares as determined by the BaFin
and communicated in its database for the minimum prices pursuant to the WpÜG under
the applicable announcement date 8 February 2007 amounts to EUR 89.07.

BIDDER has not acquired, or agreed to acquire, REPOWER Shares in the six-month period prior to the announcement of this Offer on 9 February 2007 and prior to the publication of Offer Document respectively. Pursuant to the Takeover Agreement SEDT, which is acting in concert with BIDDER, has the right to request at specific dates the sale and transfer of the REPOWER Shares held by MARTIFER and ENERGY SYSTEMS and the shares in ENERGY SYSTEMS respectively (for details see section 3.2 of this Offer Document). In such case SEDT would be obliged to pay as purchase price for each REPOWER Share a consideration amounting to the Offer Price. On 9 February 2007 SEDT has moreover purchased 20,493 REPOWER Shares at a purchase price of EUR 115.41 for each REPOWER Share. The 20,493 Shares have been assigned to SEDT on 13 February 2007. Beyond this, neither any person acting in concert with BIDDER nor any of their subsidiaries have acquired, or agreed to acquire, REPOWER Shares during the six-month period prior to the 9 February 2007 or prior to the publication of Offer Document respectively.
The Offer Price of EUR 126.00 per REPOWER Share therefore fulfils the minimum pricing requirements

Adequacy of the Offer Price
For the purpose of determining the Offer Price, BIDDER has firstly looked at the development of the stock exchange price of REPOWER Share. It is a common practice to
determine the consideration for shares in listed companies on the basis of the stock exchange price. Several professional stock analysts evaluate REPOWER. The REPOWER Shares are traded regularly and to a sufficient extent whereby the free float amounts to 44 %. Therefore, the general conditions of the stock exchange trading in REPOWER Shares should have enabled an effective pricing. Given the fact that also the legislator attaches significant importance to the valuation of target companies on the basis of stock exchange prices, BIDDER considers the application of this method of valuation as being appropriate.

The Offer Price offers the following premiums compared to the historic stock exchange
• EUR 13.40, i.e. 11.90 %, compared to the closing price for the REPOWER Shares on the electronic trading system of the Frankfurt Stock Exchange (XETRA) on the day preceding the announcement of this Offer of EUR 112.60 (source: Bloomberg), whereby BIDDER assumes that this stock exchange price had already been influenced by the Areva Offer;
• EUR 36.93, i.e. 41.46 %, compared to the Three Month Average Price prior to the announcement of this Offer of EUR 89.07 which is to be regarded as minimum offer price for this Offer (source: www.bafin.de), whereby BIDDER assumes that also this stock exchange price has already been influenced by the Areva Offer;
• EUR 36.14, i.e. 40.22 %, compared to the closing price for the REPOWER Shares on the electronic trading system of the Frankfurt Stock Exchange (XETRA) on the day preceding the announcement of the Areva Offer of EUR 89.86
• EUR 54.53, i.e. 76.30 %, compared to the Three Month Average Price prior to the announcement of the Areva Offer of EUR 71.47 which is to be regarded as minimum offer price for the Areva Offer
• EUR 63.02, i.e. 100.06 %, compared to the average closing prices for the REPOWER Shares on the electronic trading system of the Frankfurt Stock Exchange (XETRA) during the sixth-month period prior to the announcement of the Areva Offer of EUR 62.98
The Offer Price is higher than any historic stock exchange price for the REPOWER Shares prior to the announcement of this Offer.
The foregoing comparison with historic stock exchange prices reveals that the Offer Price considerably exceeds the market value attached to the REPOWER Shares prior to the announcement of BIDDER’s intention to make a takeover offer. When determining the Offer Price BIDDER has also taken into account the consideration of EUR 105.00 offered in the Areva Offer. The management board and the supervisory board of REPOWER have reviewed this consideration of EUR 105.00 in their reasoned statements in respect of the Areva Offer pursuant to sec. 27 WpÜG on the basis of their analyses and of a fairness opinion and have come to the conclusion that already this price is appropriate from a financial point of view. Compared to these considerations, the Offer Price of EUR 126.00 offers a premium of EUR 21.00, i.e. 20 %. As the Areva Offer provides for a basis of comparison and the reasoned statements include considerations regarding the evaluation by the management board, the supervisory board and their financial advisors who had access to company’s internal information relevant for evaluation, BIDDER regards taking these circumstances into account as being appropriate. Therefore, BIDDER considers the Offer Price as being appropriate and very attractive for the REPOWER Shareholders.

Financing of the Offer

BIDDER does currently not hold any REPOWER Shares. Therefore, BIDDER expects to acquire in the context of this Offer at the most 8,117,997 REPOWER Shares for the Offer Price of EUR 126.00 per share (including the REPOWER Shares held by SEDT, MARTIFER and ENERGY SYSTEMS). Thus, this Offer would result in a maximum purchase price payment obligation for BIDDER of EUR 1,022,867,622. In addition, BIDDER expects to incur transaction costs and other expenses for this Offer which should not exceed EUR 30,000,000 in total. The payment obligations of BIDDER will therefore amount to a maximum amount of EUR 1,052,867,622.

The maximum amount of EUR 1,052,867,622 will be financed as follows:
It is intended that the funds necessary to acquire up to 6,057,209 REPOWER Shares and
the transaction costs are provided to BIDDER as equity contribution by SEDT. Accordingly, SEDT has committed itself by agreement of 14 February 2007 to provide the respective funds to BIDDER by means of a payment into the capital reserves of the company.
On 9 February 2007, SEDT, AE-ROTOR and SUZLON, as borrowers, have entered into a credit agreement with ABN AMRO Bank N.V. as lender (in this Offer Document also referred to as “Credit Agreement”). The Credit Agreement provides for several tranches of debt which are dedicated for the funding of the acquisition of REPOWER Shares under or in connection with the Offer (in this Offer Document also referred to as “Acquisition Facility”). The Acquisition Facility provides for an amount of debt in excess of EUR 793,208,334 necessary to cover the acquisition of 6,057,209 REPOWER Shares and the transaction costs. Funds may be drawn down under the Credit Agreement if the conditions precedent and the documentation requirements are fulfilled or waived, no event of default (as defined in the Credit Agreement) has occurred or would occur and certain other conditions specified therein and certain representations and warranties made under the Credit Agreement are true and accurate by reference to the facts subsisting at each drawdown. BIDDER has no reason to believe that the conditions will not be fulfilled. The Credit Agreement has not been terminated and no reason for termination exists.
The remaining 2,060,788 REPOWER Shares are held by MARTIFER and ENERGY SYSTEMS. MARTIFER and ENERGY SYSTEMS have under the Takeover Agreement
entered into an obligation not to dispose of these shares and furthermore pledged these shares to SEDT. In addition, in case they still dispose any REPOWER Shares, MARTIFER and ENERGY SYSTEMS have each with respect to the REPOWER Shares held by them agreed to grant an interest-free loan to BIDDER in the amount necessary to acquire any REPOWER Shares offered or sold to third parties by MARTIFER and/or ENERGY SYSTEMS in breach of the Takeover Agreement. The payouts of these loans are due no later than the working day prior to settlement of the Offer following the Acceptance Period and the Additional Acceptance Period respectively.

Expected Effects of the Offer on the Assets, Financial and Earnings Positions of Suzlon Windenergie GmbH and SUZLON Group

The consequences of the acquisition of REPOWER on the future figures of SUZLON Group’s financial statements cannot be clearly predicted today. This is, inter alia, because
the comparability of the financial information in the SUZLON Report and the REPOWER Report is limited due to the following reasons: The SUZLON Report is prepared in accordance with Indian GAAP, whereas the REPOWER Report is prepared in accordance with IFRS. Even though Indian GAAP regulations have similarities to IFRS, there might be effects on assets, financials and earnings positions based on the different accounting rules. Those accounting differences are not considered subsequently. Neither a revaluation of the purchased assets nor a purchase price allocation is considered in this pro-forma calculation. The latest available financial information of SUZLON is the 3rd quarter of the fiscal year 2006/2007 as of 31 December 2006. Nevertheless, in order to compare the same period for the effects of SUZLON Group and REPOWER and in order to underlie a comparable data basis we adopt for SUZLON Group the report as of 30 September 2006.
Furthermore, uncertainties of the financial data derive from possible differences of the assumed exchange rates.
Subject to the above reservations and based on its current assessment BIDDER believes that an acquisition of all 8,117,997 REPOWER Shares currently in issue including the estimated acquisition costs will have the following consequences on the assets, financial and earnings positions of SUZLON Group in a pro-forma description based on the financial figures set out in the SUZLON Report and the REPOWER Report:
Expected effects if 100 % of the REPOWER Shares are acquired:
o Due to the acquisition, the balance sheet total of SUZLON will increase from EUR 1,683 million by EUR 1,216 million to EUR 2,899 million.
o The item “Goodwill and other intangible assets” will increase from EUR 312 million by EUR 881 million to EUR 1,193 million. This includes the purchase price for all 8,117,997 REPOWER Shares currently outstanding, including the estimated transaction costs related to the execution of this Offer less the equity of
o Since the acquisition will be financed through debt, the financial liabilities will increase from EUR 669 million by approximately EUR 1,067 million to EUR 1,736 million including the estimated transaction costs.
o All other items were determined by adding the corresponding amounts contained in the relevant financial statements of SUZLON Group and REPOWER.
o Potential effects resulting from the annual closing entry or any refinancing effects that might take place within SUZLON Group after the acquisition are not considered.

Expected effects if 74.61 % of the REPOWER Shares are acquired:
o Due to the acquisition, the balance sheet total of SUZLON will increase from EUR 1,683 million by EUR 1,003 million to EUR 2,685 million.
o The item “Goodwill and other intangible assets” will increase from EUR 312 million by EUR 668 million to EUR 979 million. This includes the purchase price for all 6,057,209 REPOWER Shares currently outstanding, including the estimated transaction costs related to the execution of this Offer less the equity of REPOWER.
o Since the acquisition will be financed through debt, the financial liabilities will increase from EUR 669 million by approximately EUR 807 million to EUR 1,476 million including the estimated transaction costs.
o All other items were determined by adding the corresponding amounts contained in the relevant financial statements of SUZLON Group and REPOWER.8
o Potential effects resulting from the annual closing entry or any refinancing effects that might take place within SUZLON Group after the acquisition are not considered.
The pro-forma consolidation is based on quarterly figures and does not comprise a full 12- months period or a fiscal year. Because of the seasonality of business and the financial results for the nine months ended the figures are not indicative for the full year’s
o Net sales and the operative earnings before interests, taxes, depreciation and amortisation (EBITDA) were determined by adding the corresponding amounts contained in the financial statements of SUZLON Group and REPOWER. Any deviation between the total amount and the sum of the individual amounts is caused by rounding differences.
o The pro forma consolidated net sales of SUZLON Group and REPOWER for nine months amount to EUR 1,125 million, the operative earnings before interests, taxes, depreciation and amortisation (EBITDA) amounts to EUR 186 million.
o In case of an acquisition of 100 % of the REPOWER Shares, the profit before taxes (PBT) is influenced by financial charges resulting from debt financing, whereas the interest rate is an estimated average of the expected terms and of the interest-free loan. Because of the finance costs SUZLON’s PBT on group level after acquisition decreases from EUR 141 million by approximately EUR 30 million to EUR 110 million. In case of an acquisition of 74.61 % of the shares, the profit also changes because of the lower financing costs from EUR 141 million by approximately EUR 30 million to EUR 110 million (without the profit component minorities).
o Synergies, one-off expenses for achieving this synergies and the integration of the business as well as increased amortization due to the purchase price allocation to the re-valued assets were not taken into account. Furthermore, potential effects resulting from the annual closing entry are not considered.

Important Milestones[6] in REpower Acquisition

The Sequence of events that took place before the acquisition of REpower was accomplished are presented below in chronological order:

5th Feb 2007

The largest single shareholder of REpower Systems AG, French AREVA S.A., announced its intention to make a friendly takeover offer to all shareholders of REpower Systems AG. This offer represented a cash offer of EUR 105.00 per share and a premium of 44 per cent on the three-month average of the stock price.

9th Feb 2007

Suzlon Windenergie GmbH announced a counteroffer to the takeover offer for REpower Systems AG released by the French AREVA S.A.. The counteroffer by Suzlon Windenergie – an affiliated company of the Indian wind turbine manufacturer Suzlon Energy Ltd. and the Portuguese steel construction company Martifer – represents a cash offer of EUR 126.00 per share (which corresponds to a market capital of EUR 1.02 billion).
Suzlon bid for the company in a consortium with Martifer SGPS, SA, Oliveira de Frades of Portugal. A new special purpose vehicle was formed for the acquisition, with Suzlon holding 75 per cent and Martifer 25 per cent. Suzlon and Martifer have signed a legally binding agreement, which sets out the terms for this offer. Part of the agreement is that Suzlon will finance the offer and Martifer will support it.
The offer that Suzlon made competes with the public tender offer of Areva for REpower. Suzlon's counter-offer price exceeded the price offered by Areva by 20 per cent, with the offer price being higher than any historic share price of REpower. The offer price was at a premium of 76 per cent on the average volume weighted share price of REpower over the last three months prior to the offer announced by Areva on January 22.

28th Feb 2007

Suzlon Windenergie GmbH delivered the offer document regarding the acquisition of the shares of REpower Systems AG at the price quoted on 9th Feb bid.

15th March 2007

Areva increased its offer to EUR 140 a share. The improved offer price of EUR 140 in cash for each REpower share values REpower at a total equity value of EUR 1,137 million Euro and represents a premium of 11.1 per cent to Suzlon Windenergie GmbH's offer. This also represents a premium of 95.9 per cent to the three-month average weighted share price.

10th April 2007

Suzlon Windenergie GmbH revised its offer from EUR 126 a share to EUR 150 a share in response to the EUR 140 offer made by Areva. The new deadline for the shareholders to take a decision has been extended further to 4th May 2007. There was a feeling that the there was a political dimension to this acquisition as the German Prime Minister might be in favor of Areva taking over REpower as Areva has a long and sound Past, unlike Suzlon which is a relatively new Indian company.

1st June 2007

Following the takeover offer, Suzlon owns 33.60% of REpower shares at the offer price of EUR 150 per share . Due to the voting-pool arrangements with REpower-shareholders Martifer and Areva, Suzlon controls now in total 87.1% of the votes. In the additional acceptance period, which lasted from 11th until the 25th of May, Suzlon received 25.46% of REpower’s capital.

Shareholder Structure After Acquisition

Suzlon: 33.60%
Martifer: 23.00%
AREVA: 29.90%
Free-Float: 13.50%

1. http://uk.reuters.com/article/oilRpt/idUKBOM474320070602

2. http://www.suzlon.com/images/you/PM%20RED%201%206%20%2013%2030%20ENG.pdf

3. http://www.martifier.com/

4. http://suzlonwindenergie.com/
Convenience Translation of German Offer Document (not approved by BaFin) (pdf)
5. http://www.repowersystems.de/index.php?id=88&L=1
6. http://suzlonwindenergie.com/
Convenience Translation of German Offer Document (not approved by BaFin) (pdf)
7. http://www.thehindubusinessline.com/2007/08/11/stories/2007081150542100.htm
8. http://www.vccircle.com/blog/Deals/_archives/2007/5
9. www.thehindubusinessline.com
10. http://www.repowersystems.de/index.php?id=88&L=1